Despite its muted forecast for full-year earnings, I am bullish on Chinese e-commerce giant Alibaba (BABA). Warren Buffett famously said, "Be fearful when others are greedy and be greedy when others are fearful." The adage is true for several stocks out there. But Alibaba is perhaps the greatest example in the market right now.
The e-commerce giant is not having the best time as of late. Regulators in Beijing are sharpening their knives, and many large conglomerates are feeling the pinch. Alibaba is no different. Chinese regulators fined the company $2.8 billion for abusing its market dominance. It is important to note that the fine amounts to about 4% of its 2019 domestic revenue.
The slowdown of the Chinese economy is also weighing down sentiment. The company forecast that its annual revenue growth will slow down to a crawl this year, the worst since its listing in 2014.
Hence, BABA stock is taking a pasting these days. However, the fact that shares are trading at rock bottom prices right now means that there is the potential for opportunity. Alibaba is still head and shoulders above the other e-commerce companies active in its region.
Often referred to as the "Amazon of China," operating metrics are generally rock solid. For those looking for a solid tech stock during the holiday season, look no further than BABA.
China's Growth Forecast Is Impacting Alibaba StockChina's slowing economy has impacted consumption. There are multiple reasons why this is happening. First, China is employing a zero-COVID strategy. Although many countries in Asia have decided to live with the virus, China persists in this rigorous approach. The preparedness process includes strict lockdowns, even after just one or handfuls of cases have been detected. Naturally, it leads to a slowdown in the economy.
Additionally, the energy crisis in China is just one example of how the world's supply can be disrupted by high costs for coal and inflexible electricity prices. Due to the energy shortages, local governments enforce rolling blackouts, which primarily affect industries like steelmaking or manufacturing chemicals.
Finally, Evergrande, one of China's largest property developers, and its debt burden is still big news. Beijing is trying to deleverage the sector and pacify fears. However, panic has spread to other Chinese companies as they also halt or delay payments.
These factors are combined to create a tailspin for the Chinese economy. It grew at just 4.9% in Q3, a steep drop sequentially from the 7.9% expansion in the second quarter. Hence, Chinese companies are feeling the pinch due to a strained economic forecast, and Alibaba stock is no exception.
Quarterly Results Underscore Larger IssuesOver the years, Alibaba has cultivated a reputation as a solid performer. However, its recent quarterly earnings represent a rare misstep. The e-commerce juggernaut posted Q2 revenue of 200.69 billion yuan ($31.4 billion), representing year-over-year growth of 29%. EPS came in at 11.20 yuan, a 38% dip from the year-ago period. Both revenue and EPS figures missed estimates.
Customer Management Revenue, or CMR, is the company's bread and butter. That segment, in particular, is struggling. Revenues from this area rose just 3% from the year-ago period.
A bright spot, though, is Cloud Computing. Investors are closely monitoring this area. The segment has been on a tear, jumping 33% to make up 20 billion yuan in revenue. This year's EBITA was 396 million yuan versus a 567 million yuan loss last year, proving that the company is turning things around. Moving forward, the growth of this segment will become a lynchpin of the company's overall strategy.
As highlighted in the earlier section, the Chinese economic slowdown affects BABA. However, the other major issue is Chinese regulatory concern. The Chinese government is clamping down on the domestic technology industry. Antitrust and data protection are taking center stage.
For years, Chinese tech giants grew unabated. However, Beijing now wants to regulate the behavior of the domestic technology industry. The fine of $2.8 billion in April becomes understandable in this context.
Looking ahead, BABA cut its revenue guidance for Fiscal Year 2022. Previously, the company had forecast 930 billion yuan, a year-over-year jump of 29.5%. However, now it expects much more conservative revenue growth within the range of 20% to 23%.
Management ShuffleIn light of slowing performance, Alibaba is looking to shake things up. Hence, longtime finance chief Maggie Wu is stepping down from her position. Deputy CFO Toby Xu will be the main CFO starting in April 2022.
In a press release, Wu cited her retirement as the "culmination of extensive preparation over many years" and said it would allow new blood injection into the management circle.
Alibaba is creating two new divisions — International Digital Commerce and China Digital Commerce. The change is aimed to reverse slowing growth and create a clearer path to growth and value creation. The international business division will manage the company's operations in Europe, South America, and Southeast Asia, among other places.
Alibaba has tapped 36-year old executive Jiang Fan to lead its overseas division. Meanwhile, Trudy Dai will take care of the domestic e-commerce business operations. Jiang led Taobao's push into mobile and was seen as a contender to take the reins of Alibaba Group until he became embroiled in a personal scandal last year.
AMZN Forecast Versus AlibabaThe two biggest companies in e-commerce are Amazon (AMZN) and Alibaba. The fight for global leadership has been a long one. The two companies have been going head-to-head as they both strive to become the world's leading online retailers.
Amazon launched in 1995, whereas Alibaba started up less than five years later. The former has taken over American retail, while Alibaba rules China's e-commerce market.
However, the business models of Amazon and Alibaba couldn't be more different, with the former being an e-commerce company while the latter is operating as either a retail site or auction house.
You cannot go wrong investing in either one. But at the moment, Alibaba is the better stock. The AMZN forecast doesn't call for much upside. In comparison, due to the issues BABA faces domestically, this one is trading at a huge discount.
Wall Street's TakeThe sentiment for Alibaba on Wall Street is turning bullish. The stock has a Strong Buy consensus rating, based on 20 Buys and three Holds assigned in the past three months. The average Alibaba stock forecast of $203.05 implies 76.9% upside potential.
Alibaba Stock Forecast Implies Huge Upside PotentialUnderstandably, BABA has seen better times. Alibaba is still investing heavily in new business lines as its core e-commerce business peaks and profitability slows.
If things stabilize next year, then BABA stockholders will be laughing all the way to the bank. According to Goldman Sachs, the Alibaba Group is the largest e-commerce player in China, with an estimated 69% market share for 2020.
Considering its history and size, Alibaba is a value play at the moment. Much of what is happening with the company has nothing to do with its operations. Instead, you can chalk most of that up to the intense regulatory environment in China. Nevertheless, the Alibaba stock forecast is solid. The fact that shares are available at a discount is more than enough reason to consider it.
Disclosure: At the time of publication, Faizan Farooque did not have a position in any securities mentioned in this article.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates. Read full disclaimer >
I am bullish on Walmart (NYSE: WMT). Walmart's financial chief, Brett Biggs, has made a surprising announcement. He announced that the company hasn't seen any early holiday shoppers this year. It is weighing down sentiment for WMT stock.
It is a shame considering the history of the business and its strong outlook. Walmart has a leg up on competitors this year because it's likely that it'll be able to offer customers what they need when their favorite items sell out.
Therefore, the retail juggernaut is in a prime position to succeed. It is just coming off a great quarter. Plus, the international market is progressing at a decent clip.
Compared to some of the major hyper-growth stocks out there like Tesla (TSLA) and Nvidia (NVDA), Walmart often gets lost in the shuffle. For value investors, that is a good thing. It means shares of this solid company are available at a huge discount compared to its peers. During the holiday season, the company is forecast to dominate retail sales.
The AMZN forecast is also positive. It's the "800-pound gorilla" in the room. However, WMT is available at a higher discount and upside. Income investors will also value it higher due to continuously growing upcoming dividends.
WMT vs. AMZN ForecastFor retail companies, the fourth quarter is always a bonanza. The final week of holiday shopping is in full swing, with retailers preparing for a wild ride. It is a breath of fresh air for companies like Walmart and Amazon.
Amazon (AMZN) is dominating the online shopping world. Shoppers paid $610 billion to Amazon during the trailing twelve months to June 2021. Walmart earned $566 billion during the same period. Hence, JP Morgan is confident Amazon will become the No. 1 retailer in America next year.
Nevertheless, Walmart is still a very robust enterprise. Additionally, Amazon could become even more vulnerable to antitrust measures by exceeding Walmart in terms of revenue than ever.
It is also important to put things into context. Amazon is unstoppable at this point. Consequently, most companies are feeling the pinch. It is the same feeling media companies feel when they look at Netflix (NFLX). On its own, Walmart is a behemoth in the retail industry, and it doesn't plan on stopping anytime soon.
Quarterly Earnings Repose ConfidenceWalmart's third-quarter earnings surpassed analysts' expectations by a mile. The retailer reported better-than-expected numbers, with price-sensitive shoppers flocking to its stores as the grocery industry continues seeing rising costs for household staples.
The best thing for Walmart coming out of earnings season is the robustness of its supply chain. The retailer also charters its own ships, so there are no hiccups in supply. Therefore, Walmart stands amongst a select few companies effectively managing the current supply chain crisis.
Walmart CEO Doug McMillon reaffirmed this sentiment. Inventory for the U.S. is up 11.5% in anticipation of the busy holiday season. Hence, the chances of running out of inventory are slim. The retailer has been preparing for the holidays early and prioritizes key products on ships.
In light of this impressive performance, Walmart upped its guidance. The retailer now forecasts adjusted earnings per share of approximately $6.40 for the year. Previously, the company was forecasting earnings in the range of $6.20 to $6.35.
Walmart DividendsWalmart is a company that has been paying and growing its dividend since 1974, making it worthy of any income investor. The retailer is always at the top of the list whenever income investors look for upcoming dividends.
Walmart, a Dividend Aristocrat and two years from becoming the next Dividend King, has an enticing dividend yield of 1.58%. A Dividend Aristocrat is an S&P 500 company paying and hiking its base dividend for a minimum of 25 consecutive years.
Wall Street's TakeWall Street is betting big on Walmart. On TipRanks, 18 Wall Street analysts offer 12-month price targets for Walmart. The big-box retailer carries a Strong Buy consensus based on 15 Buy ratings, three Hold ratings, and zero Sell ratings assigned in the past three months.
The 12-month Walmart price target is $172.11 on TipRanks, implying an upside of 21%.
AMZN Forecast Not Enough to Edge WalmartThe holiday season is like a World Series, Superbowl, and Stanley Cup for retailers. Amazon and Walmart are the two biggest e-commerce retailers on the planet. Naturally, they both will rake in billions.
Walmart's revenue in 2021 is expected to be $559 billion. Still, its e-commerce sales only represent 13.4% of that total which means the majority comes from traditional brick-and-mortar stores like Walmart locations across America. That will irk investors, especially since the e-commerce trend is secular.
However, Amazon is not without its struggles. It's not surprising that the e-commerce giant recently reported an even sharper-than-expected drop in earnings, as it was hit hard by supply chain issues and had its staff stretched thin. Hence, the rosy AMZN forecast needs to be put into context.
Due to a combination of dividends, robust outlook, and solid fundamentals, Walmart is a stable investment for any portfolio.
Disclosure: At the time of publication, Faizan Farooque did not have a position in any securities mentioned in this article.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates. Read full disclaimer >